INVESTMENT POLICY STATEMENT
Cabrillo Education Foundation Endowment Fund
The purpose of this Investment Policy Statement (“IPS”) is to establish a clear understanding between the Cabrillo Education Foundation Endowment Fund (“Client”) and Johnson Lyman Wealth Advisors (“Advisor”) regarding Client’s investment objectives for the assets (“portfolio”) managed by Advisor. This IPS is not a contract. No legal counsel has reviewed it and the Advisor and Client use it at their own discretion.
Revised March 2, 2012
Investment Policy Responsibilities: Client is responsible for setting investment policy and communicating current and subsequent investment circumstances, objectives and constraints to Advisor. Client is responsible for directing Advisor to make changes to this IPS and to approve or disapprove of Advisor’s recommendations regarding this policy. Advisor is responsible for educating Client on the risks and potential rewards of various asset allocations, for assisting Client in creating a portfolio that is appropriate for Client’s circumstances and objectives, and for implementing Client’s investment policy decision.
Investment Objectives: The purpose of the Cabrillo Education Foundation Endowment Fund (the “Fund”) is to supply a reliable and sustainable source of supplemental funds to support all seven schools that reside within the Cabrillo Unified School District. The Fund will provide resources in perpetuity to assure that fundamental and sustainable improvements occur at all the local schools.
Investment Principles: The philosophical foundation for how the Client’s portfolio will be structured and subsequently managed takes into account the principles of Modern Portfolio Theory as well as those established by leading financial experts. Such principles include the following:
- Risk and return are related. Investors seeking higher rates of return must accept a higher exposure to risk in their portfolio. If pursuing a higher rate of return, Client must also accept a greater variation of results, including declines in value.
- Major asset class allocation is important. The allocation of capital to asset classes (see Major Asset Class Policy) within Client’s portfolio is likely to have a far greater influence on the long-term performance of Client’s portfolio than the selection of individual securities. Hence, Advisor’s principal focus is on maintaining an appropriate major asset class allocation for Client.
- Broad diversification reduces investment volatility. Broad diversification will be used in the Client’s portfolio to minimize exposure to non-systematic risks. In addition, multiple asset classes with non-perfect correlation will be used to help minimize the variation of returns expected from Client’s portfolio.
For any given time period, a particular combination of assets produces a portfolio with the greatest return given a particular level of assumed risk (i.e., an “optimal portfolio”). While it is straightforward to identify optimal portfolios given past historical performance data, historical asset class results are no guarantee of future asset class behavior. Therefore, designing a portfolio which will perform optimally in the future is a difficult and uncertain process requiring substantial judgment. Given these circumstances, Advisor will recommend a portfolio design that Advisor believes is appropriate to Client’s needs, goals and circumstances, and that is expected to behave in a reasonable fashion under a wide set of market conditions.
Investment Time Horizon: The time horizon for these assets is very long, representing the indefinite life of the Fund. However, as substantial a distribution as is fiscally prudent to maintain the Endowment’s principal, but not less than four percent nor more than ten percent of the Fund, will be distributed each year. Capital values do fluctuate over shorter periods and Client recognizes that the possibility of capital loss exists. However, historical asset class return data suggest that the risk of principal loss over a holding period of at least five (5) years can be minimized with the proposed long-term investment mix.
Risk Tolerance: Because of its long Investment Time Horizon, the Fund is comfortable maintaining a strong equity bias in its portfolio. Capital values do fluctuate, however, and Client recognizes that the possibility of capital loss exists, especially over shorter time periods.
Major Asset Class Policy: The “Major Asset Class” allocation policy is indicated in the “Investment Policy Decision” pie chart on the attached “Portfolio Summary” and indicates the overall investment policy that will be followed in the management of Client’s portfolio. In accordance with this policy, Client’s portfolio will be apportioned as indicated among the following major asset classes: Fixed Income (stability oriented), Alternative (primarily growth oriented), and Equity (growth oriented):
|Major Asset Class||Sub-Asset Class||Asset Class Description|
|Fixed Income||Cash||Cash equivalents and ultra-short-term bond funds.|
|Bonds||US and international fixed income securities which in Advisor’s opinion offer both income and relative stability of principal.|
|Alternative||Other||Assets which have relatively low correlations with the Fixed Income and Equity major asset classes. Examples include, but are not limited to, real estate (REITs), natural resources and commodities, flexible and asset allocation funds, and growth-oriented bond funds.|
|Equity||US Stocks||US equities.|
|International Stocks||International developed and emerging market equities.|
The Fixed Income major asset class is stability oriented and primarily defensive in nature (having lower expected return and lower overall investment risk). The Alternative and Equity major asset classes are primarily growth oriented in nature (having higher expected returns and higher overall investment risk). Advisor has discretion to adjust each major asset class target within a range of plus or minus 10 percentage points of Client’s indicated policy targets. Advisor may also tactically underweight or overweight sub-asset classes within each major asset class. Advisor will seek to maintain the portfolio near the major asset class targets (as adjusted) by rebalancing as appropriate over time (see Rebalancing Procedure).
Updating Investment Policy. Changes to the Client’s indicated major asset class policy may be made if significant changes have occurred in the investment objectives or risk tolerance of Client. When and if such changes are made, updates may be made to this IPS through an updated Portfolio Summary attachment. Such an updated attachment, upon approval by Client, will supersede any prior established allocation of major asset classes and be made a part of this IPS. Unless Client explicitly provides updated instructions to Advisor through these means, Client agrees that Advisor will manage Client’s investment accounts according to currently provided instructions.
Historical Portfolio Returns and Volatility. A separate attachment entitled “Historical 10-year Returns and Volatility for Risk Group 5” is included and made a part of this IPS in order to demonstrate the historical 10-year behavior of a portfolio that is broadly similar in investment risk level to that being proposed in this IPS. Historical returns are presented as a multiple of the rate delivered by certificates of deposit over the indicated period. Historical volatility is presented as the number of periods of one month or longer where portfolio value was falling and includes data on the depth of each drop in portfolio value. Information is also provided for the 10 deepest declines in portfolio value over the indicated time period, including the duration of each fall and the number of months which were required for a full recovery in value.
Permitted Security Types: The Fund will invest primarily in “no-load” mutual and exchange-traded funds. The mutual funds selected will typically be “institutional” funds available through Schwab Institutional. Consideration will be given to the underlying expenses of the mutual funds and to a demonstrated manager track record of success. Tax efficiency is not a consideration.
Individual securities normally will not be purchased. If contributions of individual securities to the Fund are made, they typically will be liquidated and the proceeds reinvested in mutual or exchange-traded funds.
Rebalancing Procedure: From time to time, market conditions will cause the asset allocations in Client’s portfolio to vary from the policy stated in this IPS. Advisor will periodically rebalance the portfolio to bring these allocations closer to their targets. Client acknowledges that this will generally involve selling securities in the portfolio that may have appreciated and purchasing securities that have not performed as well. Advisor will take trading costs and other implementation fees into account prior to rebalancing.
Tax Policy: Not applicable as Client is not a taxable entity.
Liquidity and Anticipated Distributions: Liquidity needs in general are low. As substantial a distribution as is fiscally prudent to maintain the Endowment’s principal, but not less than four percent nor more than ten percent of the Fund, will be distributed each year. Advisor may, at Advisor’s discretion, increase the proportion of Cash as a percentage of all defensive assets in order to appropriately plan for Client distributions from the portfolio. Such a change in allocation to cash as a percentage of all defensive portfolio assets shall not require a newly-executed “Portfolio Summary” attachment.
Review Frequency: Client recognizes that all investments go through cycles and that there will be periods of time in which the investment objectives are not met, or when specific asset classes or sub-classes fail to meet anticipated performance expectations. Client accepts the principle that in the absence of specific circumstances requiring immediate action, patience and a long-term perspective will be employed when evaluating investment performance. Client and Advisor mutually agree to periodically review the portfolio and the investment policy described in this document.